Julie Brown, Mindlance Pay+ Division Leader, has joined us on the blog to discuss what to look for an Agent of Record. What is an AOR? How do they fit in to your contingent workforce program? And how do they fit in with independent contractors?
For companies that employ contingent labor, an Agent of Record (AOR) is a third-party service provider for classifying and ensuring compliance of independent contractors. Independent contractors must meet certain requirements depending on their role and the state in which they work. Misclassification of independent contracts is a common issue, which can be costly to employers. With so many variables, it can be a challenge for employers or Managed Service Providers (MSPs) to manage this on their own.
What Does an AOR Do?
It all begins with the vetting process. An AOR starts with classification. Is this contingent worker classified as an independent contractor? Are they set up as an incorporated business (Inc.) or a limited liability company (LLC)? Do they have a federal employment identification number or do they use their own social security number? It’s important for an independent contractor to file their taxes via W9 rather than their social security number as this can be a red flag for the Internal Revenue Service (IRS).
The AOR will then engage with the worker in a standard contract and facilitate any negotiations. This is reported back to the end-client along with any recommendations for tweaks or ongoing assessments to mitigate potential risks associated with an independent contractor. Throughout the duration of the project, the AOR will assess the independent contractor to ensure they maintain necessary certifications and insurances to avoid a classification change.
Finally, the AOR provides pay agent services to ensure the independent contractor is paid based on approved client work. All of these activities work to indemnify the client against misclassification mitigation.
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The Importance of Compliance
There are multiple state and federal agencies with different standards and tests for whether a worker should be classified as an independent contractor or an employee. It’s very complex. At the federal level, you have the Internal Revenue Service (IRS), Department of Labor, Fair Standard Labor, Wage & Hour. In addition, different states have different tests and their own taxation requirements.
Why do they care? Different state employment laws are there to ensure an individual is not coerced into an independent contractor model. The laws serve to prevent companies from taking advantage of individuals for the sole purpose of saving money on taxes, medical benefits, insurance, etc. State income tax authorities, unemployment tax, and others would not get their revenues because these individuals are being classified as an independent contractor. These laws protect workers and ensure the states are getting the revenue they expect.
While AOR services are generally one-size-fits-all, there is one major thing to look for in your AOR: what platform are they using to track compliance?
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Why AORs Use Technology Platforms
When we talk about contingent worker classification, an AOR must have a technology platform. Your provider should not try to make this decision on spreadsheets. With so many stakeholders involved in determining whether a worker is an independent contractor, it’s crucial to stay up-to-date to avoid misclassification.
Throughout the term of the project, AOR’s must ensure that the independent contractors maintain the certifications and insurances required by the end client. In addition to a certificate of insurance with appropriate limits required by the client, the contractor may require other insurances depending on the type of work they are providing. Perhaps they must maintain errors and omissions, cybersecurity, or auto coverage. Certifications and licenses required by the state and the client must also be up-to-date.
Your AOR should have a technology platform in place to track all of these items, but they can also work with your vendor management system (VMS). Check with your provider to see if they work with a preferred vendor or have integrations that can augment your own system.
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An Opportunity for Success
With so much to consider when working with an independent contractor, it’s important to not lose focus. You’re hiring them to complete a project and it has the opportunity to be a great experience for both the worker and client. Misclassification is more often identified through the individual seeking worker’s compensation for an injury or filing for unemployment upon completion of the project rather than an IRS audit.
An AOR can advise on the best strategies for engaging with the independent contractor throughout the project, improving net promoter scores, and building a lasting working relationship.
Don’t fear engaging with independent contractors – they’re important. Just pick the right AOR provider that has all the bases covered, not one who will just “rubber stamp” a decision without a system in place.